There’s more to sourcing than just acquiring products – a good sourcing plan aligns with your corporate strategy, which, hopefully, should be focused on green products and initiatives. That’s why Aberdeen’s benchmark report on “Product Compliance: Protecting the Environment, Protecting Profits” (sponsored download temporarily available courtesy of Managing Automation) caught my eye.

This report starts off by stating that most manufacturers have not developed systematic, repeatable product compliance processes that efficiently address today’s complex and challenging business environment with an every increasing corpus of complex legislation (including the recent EU RoHS directive and the 7th Amendment to the Cosmetics Directive) placing constraints on the design, distribution, and reclamation of each and every product produced.

Manufacturers today spend considerable time and effort ensuring that their products comply with a multitude of regulatory mandates. Yet many companies’ approaches to ensuring compliance have left them at a high risk of noncompliance, potentially resulting in an inability to sell in global markets, unmet customer mandates, blocked shipments, and associated revenue loss. The high risk level exists despite significant efforts to achieve compliance by most companies. In fact, meeting compliance challenges today has resulted in increased product development cost, decreased ability to innovate, and added staffing.

The most interesting finding in the report that caught my attention was that compliance performance is less dependent on level of effort than on implementing best practices and enabling those practices with the appropriate compliance infrastructure. In other words, brute force can not be used to tackle the problem, you need technology enabled best practices.

According to the report, top business initiatives being pursued include:

• design for compliance
• improving compliance documentation and evidence
• bundling compliance into NPD (new product development) processes
• proactively monitoring product designs for compliance
• physically auditing products against compliance requirements

Furthermore, Aberdeen’s findings demonstrate that investments into best practices and enabling technology really pay off. Best in class companies have compliance rates of 90% or more, as compared with laggards who average 10% to 40% of products in compliance with applicable requirements. In addition, leading companies have 53% fewer stopped shipments than other companies and top performers have 35% fewer product recalls. Furthermore, there is often a strong disconnect between self-reported levels of compliance and assessed level of compliance. For example, Aberdeen’s “Environmental Compliance in Electronics” study (now AberdeenAccess members only) found that actual compliance levels are lower than self-reported and that companies are typically at a higher risk than they believe.

What are the major challenges that impact product compliance? According to the study, challenges include:

• lack of consolidated information on regulatory requirements
• lack of accurate product data
• difficulty to determine applicability or exemption
• resource or skill shortages
• differing requirements by country
• inefficiency in gathering material data from suppliers

These challenges can be addressed by the recommendations offered by the report:

• adopt proactive compliance strategies
  and consider exceeding the strictest global standards in order to enable global sales
• proactively monitor and assess compliance early in and throughout the product lifecycle
• seek more detailed product composition from suppliers
• audit content to address potential variability in your supply chain
• standardize and centralize compliance processes and organizations
• automate compliance processes with a compliance infrastructure

and by the following processes and technologies:

• a Six Sigma mentality
• collaboration and workflow automation technology
• innovation on demand
• a world-class Center Led Procurement organization

Should cost modeling is the process of determining what a product should cost based upon its component raw material costs, manufacturing costs, production overheads, and reasonable profit margins. Knowing roughly what a product should cost transfers pricing power form a supplier to a purchaser, especially for strategic purchases.

To the best of my knowledge, there are not a lot of solution providers out there that specialize in the productions of tools and methodologies for should-cost models, but one such vendor is Akoya (acquiired by I-Cubed in 2014), a company that Spend Matters‘ own Jason Busch likes to blog about frequently (in such posts as “In-sourcing” Outsourcing, Direct Materials Costing and Spend Management”, and “Akoya: Next Generation Spend Analytics”?*). Recently, Akoya produced a short paper entitled “Analytically Derived Should-Cost Information is Critical for Improving Product Margins: An Example for Cast Parts” that, despite being focused on a specific commodity, had some sound generically applicable advice for should-cost modeling.

When a purchaser knows what a part should-cost, then she knows what she should pay for it. Thus, this knowledge is critical for identifying mis-priced parts, parts with high markups, parts improperly sourced with vendors who are not suited to produce the part, and overly complex parts in need of simplification and re-engineering. Knowledge of should-cost is critical for efficient design, sourcing and procurement. And, as indicated above, should-cost is much more than the price of metal. In other words, until you know roughly how much you should be paying, you do not know whether or not there is enough of a savings opportunity to justify a considerable sourcing effort.

If the difference between the approximated should-cost and actual cost of a product is roughly 20% or more, than that product represents a considerable savings opportunity and should be part of a strategic sourcing initiative in the near future. If the difference is 10% or less, than you are probably getting a good price on the product and should not spend too much time trying to negotiate a better price when much more significant savings opportunities await. If the difference is somewhere in the middle, then, once you have tackled all of your high discrepancy commodities, you should refine your analysis and tackle any for which the expected difference increases.

What should you do when you identify a potential savings opportunity from a should-cost analysis? According to Akoya, three things. First, the parts can be submitted to the vendors for re-quoting. It is frequently the case that when asked for a re-quote that the vendors will recognize and correct pricing problems. Second, it is sometimes the case that the parts are sourced with a vendor that cannot efficiently produce the part. In these situations, the part can be resourced with other, more appropriate suppliers. Third, the part may be redesigned to reduce its complexity and thereby reduce its manufacturing costs.

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.